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Tue 30 Jul 2013 08:17 PM

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IMF warns Dubai over new real estate bubble

International Monetary Fund says emirate might need to act to arrest house price increases

IMF warns Dubai over new real estate bubble

The International Monetary Fund warned Dubai on Tuesday that the emirate might need to intervene in its property market to prevent another boom-and-bust cycle of the kind which brought it close to default four years ago.

Over-inflated Dubai real estate prices crashed by more than 50 percent in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world.

The economy and the property market are now recovering, but so strongly that the IMF worries another bubble could form - and because Dubai's debt has continued to rise, it might have difficulty coping with fresh instability.

Harald Finger, IMF mission chief to the United Arab Emirates, noted that by one commercial bank's estimate, listed Dubai property prices soared 35 percent from a year ago in June.

"It is too early to speak of a bubble, but should price increases continue to take place at this pace, action will need to be taken to prevent a bubble," he said after annual economic consultations between the IMF and the United Arab Emirates.

Last year the UAE central bank tried to introduce caps on home mortgage lending as a way to head off another bubble, but suspended them after lobbying by commercial banks, which complained their business would suffer.

The central bank is now negotiating revised caps with the banks, but Finger said that because much home buying in the UAE was done with cash rather than mortgages, the mortgage rules would need to be complemented by other measures.

If property prices continue to surge, one suitable step might be introducing fees on real estate market activity, he told a media conference call.

However, Dubai's business success has been built on a low-tax environment, and it is not clear whether the emirate would be willing to consider such a step.

Finger said he had discussed the idea of fees with Dubai officials, who had replied that they might be considered but would need careful coordination with the rest of the UAE to ensure that Dubai's competitiveness was not damaged.

Dubai property developers, many of them linked to the government, have announced a string of massive real estate projects over the past nine months, including high-end housing, shopping malls and amusement parks - reminiscent of previous building crazes that included the construction of palm-shaped man-made islands and other high-profile projects.

The Al Bayan newspaper, a UAE publication, calculated that if they all went ahead, the projects would require total financing of over AED666bn ($180bn).

Finger said that since Dubai's government-linked enterprises (GREs) were still saddled with debt from the last crisis, they would need to tread carefully to avoid being vulnerable if another bout of volatility in global financial markets hit the emirate's property sector.

"These projects increase business confidence, but they also call for prudent economic policies in order to prevent a possible build-up of a renewed boom-and-bust cycle in the UAE."

In a report, the IMF said the total debt of the Dubai government and its GREs had risen $13bn to $142bn between March 2012 and April 2013, reaching 102 percent of the gross domestic product of Dubai and the UAE's small northern emirates. Finger called that level "a source of concern".

The government's debt rose $4.5bn as Emirates NBD , Dubai's top bank, lent it more money. The concentration of ENBD's loans to the government is high, raising corporate governance and risk management concerns, the IMF said.

ENBD has said it is managing its loan book prudently and this month cut its estimate of non-performing loans this year because of a strengthening local economy.

The IMF estimates that about $64 billion of debt held by Dubai and the GREs will come due between 2014 and 2016, some of it the result of debt restructuring deals done in the wake of the last crisis.

A plunge in Dubai bond yields last year shows that financial markets believe the emirate will have little trouble repaying that debt. But the IMF said: "Although Dubai's operating environment improved markedly, these large rollovers, particularly for the GREs, could still prove challenging."

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jonjon 6 years ago

every economy in the world has its boom and bust cycles but they're usually spread over a decade or so. if it happens again in dubai then dubai's government needs to redraw in economic strategies because it won't be able to sustain such major movements in the economy. with a high debt level already it would be difficult if not impossible for it to climb out of another bust.

WHJ 6 years ago

Real estate in Dubai is still much more affordable than in Hong Kong, Singapore, London, Monte Carlo, Geneva and New York!!
Japan's debt to GDP was 211% in 2012, the UK's was 90% and the US's was 101%. Singapore had a debt to GDP ratio of 111.4% in 2012.

MSA 6 years ago

@WHJ: You cannot compare apple with orange. Every country is different in their own ways and the way people earn is different and the way people spend and have expenses is different. This is a fact that majority of the crowd cannot afford high rents due to rising costs of living and stagnant income, and moving to other cities which will make it crowded, eventually people will start leaving again, and Dubai will be in the same spot it was in back in 2008...which is not a good thing AT ALL! Rents should be capped efficiently..

LetMeAddSomething 6 years ago

@WHJ, true and the reason is that Dubai is not on the same league as any of the cities you mention.
Dubai is a great regional hub but that is it, it is not in the same league neither for business (NY, HK, L, Sg) nor for quality of life (Montecarlo, Geneva)

Japan's debt is hold mostly by Japanese and denominated in yen, Government does not need to default. Dubai's debt is in USD and hold in many cases by foreigners, what happened with Dubai World is a default in anything but name

Louie Tedesco 6 years ago

Help us with our maths, please. Dubai has a population of 2.1 million of which 71 percent are foreigners. This leaves a local population of only 600,000 from infant to the elderly. How can they shoulder and re-pay $142 billion in debt? This sum equates to $237,000 in govenrment debt per head - for every citizen aged from infant to retiree! Foreigners can (and often must) leave, locals reside here and this national debt remains with national residents, in addition to any private debt they may have.

jimmy jones 6 years ago

Just like London, NY, Paris and Hong Kong- Dubai prices are rising because of disparity between supply and demand.
However , as Dubai prices started from a very low base, the % increase may seem higher.

Jaber Mohammad 6 years ago

Quoting the article posted by Arabian Business above, second paragraph:
"Over-inflated Dubai real estate prices crashed by more than 50 percent in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world." .
So, you think Dubai's real-estate crash caused the International Financial Crisis? seriously?

Shahzad 6 years ago

Inshallah this time there wil be no crash. I work in real estate and believe me the government has set a system that will not allow another crash. Now there are thousands of rich people from Egypt, Iran, Pakistan, Russia coming to Dubai every month, and this means they will buy more and more properties and market will keep going up. IMF is always be negative when an Arab or Asian country economy is doing good

Faisal Ghadiyali 6 years ago

The cycle of peak ends when the person steps the peak as you are blind & cant figure out the next step but cautious measure always give a parachutte while diving from sky. Rents are stagnant due to extra favours to tennats by commitee which needs immediate attention as the approach should be balance by increasing 5 to 8% per annum. Secondly the LTV ratio & bank criterias are always helping buble so indexing needs to be done whereas the NOC from private developer to master developer & to land dept transfer should be a one window operation as it will reflect the appraising or proper wealth evaluations. Also property title verification dept must address the issues related to property owners associations.

Real Estate 6 years ago

They didn't say it caused the international financial crisis, they said it unsettled markets globally.